Gold prices have surged to historic highs above $2,400 an ounce this year, fueled in part by a surge in demand from China, the world’s biggest consumer of the precious metal.
Geopolitical Tensions and Chinese Buying
Several factors are contributing to the gold rally, including ongoing geopolitical tensions in the Middle East and Ukraine. However, analysts point to China’s unwavering demand as a key driver. Retail investors, fund managers, futures traders, and even the central bank are all turning to gold as a haven investment in these uncertain times.
China’s gold consumption continues to outpace its rival, India. Last year, Chinese demand for jewelry, bars, and coins hit record levels, with jewelry demand rising 10% and bar and coin investment surging 28%. Analysts believe there’s room for further growth. Limited investment options in China, a troubled property sector, volatile stock markets, and a weakening yuan are pushing investors towards assets perceived as safer bets.
Record Imports and Central Bank Buying
China remains a major gold importer despite being the world’s top producer. In the past two years, China’s overseas gold purchases surpassed 2,800 tons, exceeding the total holdings of gold-backed exchange-traded funds globally. China’s central bank, the People’s Bank of China (PBOC), has also been on a buying spree for 17 consecutive months, the longest stretch ever. This buying spree reflects the PBOC’s desire to diversify its reserves away from the U.S. dollar and hedge against currency depreciation.
China’s gold demand remains strong despite record-breaking prices and a weaker yuan, which reduces purchasing power. Chinese gold buyers often pay a premium over international prices, which recently jumped to $89 an ounce. While high prices may dampen some enthusiasm, China’s appetite is seen as a key factor supporting the ongoing rally. Analysts suggest this strong demand could help establish a higher floor for gold prices.
Cautious Optimism and Regulatory Measures
While China’s gold demand is positive news for the market, Chinese authorities are expressing some caution. State media has issued warnings to investors about chasing the rally too aggressively. Additionally, both the Shanghai Gold Exchange and the Shanghai Futures Exchange have increased margin requirements on certain gold contracts to curb excessive risk-taking.
Exchange-traded funds (ETFs) offer another way for Chinese investors to participate in the gold market. Money has flowed into gold ETFs in mainland China for most months since June 2023, contrasting with outflows seen in gold funds elsewhere. Limited investment options in China beyond domestic property and stocks are likely contributing to this trend. Analysts expect Chinese demand for gold to keep rising as investors seek to diversify their portfolios with commodities.
Source: Mining.com
